Rent vs Buy

The rental marketis extremely competitive, no amount of blaming landlords can alter the fact that prices have been flat for almost 30 years when compared to Household Incomes. There is a common misconception that you can use wages as a comparison factor, but as you know there is often more than one worker in a household contributing to rent.

House purchasing however is extremely related to two factors, the cost of buying a house compared to Household income - ie mortgage rates, (not capital cost which is almost ignored) and the level of speculation, which is stronger in Auckland as we all suspected. It is more expensive to own a home than rent.

The following chart shows in dotted lines the cost of ownership as a proportion of Household income, including interest, rates, insurance and maintenance for Auckland in Blue and Wellington in green. The solid lines show the geometric mean rents as a proportion of HH income. This means you can legitimately compare the two lines of each colour, and it is clear that it costs less to rent than own, about 20% of household income. However owners also reap the rewards of capital gain if there is any.

Periods of Speculation show through as surges in ownership costs, up to 2007 it was interest rate driven and more recently FOMO driven. Currently, rather than a lot of the odd comments in the press, the reality is that speculation is downing ownership costs are down. Rental supply exceeds demand in Auckland with demand exceeding supply in Wellington (for now up to January, February looks like a change is happening)

Auckland has experienced three periods of speculation in my data; 1995-98, 2004-08 and 2014-18, while Wellington has only had the 2004-08 period as a strong speculative period. However, most of the price increases we have ever seen are simply interest rate driven, and that increase is not delivered through to rents, until demand or supply shifts.


Data Sources

The chart is a combination of data from these locations:

  1. CV, from Landlords.co.nz - https://www.landlords.co.nz/housing-statistics/
  2. Geometric Mean Rent from MBIE new bonds - ie its only the latest rental agreements https://www.mbie.govt.nz/building-and-energy/tenancy-and-housing/rental-bond-data/
  3. Household Income from Stats - http://nzdotstat.stats.govt.nz/WBOS/Index.aspx?DataSetCode=TABLECODE7480, I use all income from all sources - before tax, whereas some use wage and some use disposable income which I presume is after tax
  4. Interest rates are the 1yr standard new residential rates https://www.rbnz.govt.nz/statistics/b20-new-customer-average-rate
  5. For expenses I use a series from my own experience of owning many properties over 20 years - that results in three recent numbers - Maintenance $4,500pa, Rates $2,300pa and Insurance about $1,000pa, with reductions in the past as you would expect, noting that maintenance and insurance have recently increased a lot more than inflation

This is a repeat analysis from 2016, but with slightly different raw data, the RBNZ updated its interest statistics limiting me to fix a term that is popular, I chose 1yr, which may or may not be perfect, but is what it is.

Housing Crisis

The problem of the "housing crisis" is in the wider community due to low wages for single income families making it difficult to meet the rents that higher income families are prepared to pay (or groups of people). Many cannot afford private rentals so need subsidies, that is a wage problem not a housing problem. Addressing the issue through rental subsidies is likely to increase rents by increasing demand, it may be better to focus on increasing wages.

Jonette 2011